In the 1980s, the Arab Republic of Egypt’s economy was weak: the government was overspending, the debt was increasing, and they suffered from double-digit inflation. The Government of Egypt determined that it was time to make some adjustments so that their economy could survive an increasingly globalized world. As a result, the Egyptian government introduced the Economic Reform and Structural Adjustment Program (ERSAP) for the purposes of: (1) decreasing structural unemployment, reducing the debt, and lowering inflation. The Economic Reform and Structural Adjustment Program (ERSAP) sought to convert Egypt’s economy into a market-based economy, and increase Egypt’s overall credit-rating through adjustments in all different sectors (Korayem, 1997),

Initially, the ERSAP was a staggering success. With inflation down to the single digits in the 1990s and with a decreased deficit, the government was effectively managing the relationship between the domestic and international spheres. With a 6.3% GDP growth rate and the deficit down to 1% of GDP in 1997, the government was content with their progress and were convinced that they were on the right track to building Egypt’s economy.

Unfortunately, Egypt’s happy days were short-lived, as the government could not possibly anticipate the world they were about to enter. In 1997-1998, a financial crisis shook East Asia like an earthquake: four East Asian economies were destabilized, and neighboring countries began to feel the effects. Thanks to the financial crisis, the gross domestic product of a lot of Asian countries decreased, which limited their trade. The shock of the financial crisis, however, was not only limited to Asian countries. Nations, like Egypt, that maintained good trade relations with these countries began to see lower trade, which, in turn, lowered their GDP. In order to maintain economic equilibrium, the Egyptian government had to adjust the ERSAP program to account for these changes (UN Department of Economic & Social Affairs 2011).

Yet, the worst was not over. On November 17, 1997, 62 people were killed at Deir el-Bahri, a tourist site in Egypt. Many believe that an Egyptian Islamist organization launched the attacks to undermine Egypt’s economic progress to the point of widespread social and political revolution (UN Department of Economic & Social Affairs 2011). While the details are still a mystery, one thing is clear: the attack definitely impacted the Egyptian economy for the worse. With rumors on the rise, Egypt’s tourism industry took a nosedive. Egypt’s GDP also decreased, and the government had to put their plans on the back burner.

After 9/11, Egypt’s economy suffered even more, and the government found themselves struggling to make the necessary economic adjustments in response to these shocks (UN Department of Economic & Social Affairs 2011). In 2001, we began to see the ways that these issues impacted Egypt’s economy, as the GDP had been lower than it had been in a decade (ERF 2004). Consequently, Egypt’s other issues began to creep up for the first time since the ERSAP was passed: unemployment increased, inflation intensified, the deficit worsened, and domestic dysfunction plagued the Arab Republic of Egypt once again (UN Department of Economic & Social Affairs 2011). Egypt also suffered from poor productivity, and inefficient production, which exacerbated domestic unemployment and decreased their international economic competitiveness (ERF 2004).

In 2004, the Egyptian government decided to take matters into their own hands, and introduce a series of economic reforms to help their economy get back on a prosperous path. In order to meet the new challenges, the Egyptian government established a special cabinet to deal with the unique challenges the country faced, and to develop stronger supply-side economics. The cabinet sought to develop better micro-level policies that would make Egypt a hub for international business. The organization evaluated Egypt’s state of affairs, and made a number of policy recommendations so that Egypt could survive and thrive in a changing world. The cabinet mainly sought to revitalize Egypt’s tax structure by reducing taxes and tariffs to improve Egypt’s bilateral and multilateral relationships.

Later that year, the Cabinet’s suggestions became actual policies. On September 9, 2004, President, Hosni Mubarak, mandated a 40% reduction in tariffs and a complete elimination of administrative fees (US Department of Commerce). The President explained that, while the policies would cost the government around $460 million over an 18 month period, they would yield increased international competitiveness through stronger compliance with the World Trade Organization’s stipulations (US Department of Commerce). By complying with the World Trade Organization’s standards, it was clear that Egypt was moving towards internationalizing their practices in an effort to improve their standing in an increasingly globalized world.

While the tariff reductions were targeted to an international audience, they indubitably affected Egypt’s domestic economy. According to the government, the policy targeted two main industries — the internet technology and vehicles (US Department of Commerce). Firstly, the tariff reductions completely eliminated customs costs and tariffs on IT in accordance with Egypt’s Information Technology Agreement with the World Trade Organization. Pursuant to this agreement, 59 countries would eliminate tariffs on information technology products for the purposes of increasing international collaboration (WTO News 2003). In addition to its international impacts, the policy would make it cheaper for businesses to invest in technology, which would revolutionize local business practices and increase long-term productivity. Secondly, the plan targeted vehicle operations in order to improve local transportation of goods (US Department of Commerce) Figure 1 outlines the different industries affected by these changes:

Thanks to these reforms, local manufacturers would have the chance to import their capital goods at a substantially lower price in order to produce a higher quantity of goods. With the increased quantities, the supply curve would shift rightward, which would decrease the prices of the goods and make them more competitive in the domestic and international markets. This would, in turn, increase the demand for the goods, which would increase Egypt’s overall gross domestic product through increased consumption. With the improved business environment, Egypt hoped to experience improved investment, which would also yield more GDP growth (US Department of Commerce).

In June of 2005, the Cabinet tackled the taxes by introducing a tax code that reduced personal and corporate taxes by 50% (Ministry of Finance 2007). Through these large-scale reforms, the government believed that the taxes would translate to increased disposable income, which would yield higher consumption and investment. In 2007, the Egyptian government began to see the fruits of their labor when the Real GDP increased to an average 4.37% over three consecutive fiscal years. Table 2.1 juxtaposes the progress made in 2005-2007 with previous years, and the ways that this affected the other sectors.

As the figure shows, Egypt experienced extremely high levels of government deficit and inflation in the 1990s. While the investment was extremely high in those years, the Real GDP was definitely below Egypt’s potential. Yet, in the early 2000s, the Real GDP increased, and, in the wake of these policies, continued to grow in 2005-2007. According to the UN Department of Economic and Social Affairs, the growth can be attributed to Egypt’s expanding economy. In the past, Egypt benefitted from a strong tourism industry, but, thanks to these reforms, Egypt was able to supplement their natural beauty with concrete and tradeable goods and services. Egypt’s GDP growth reflects increased investment into the Egyptian economy (UN Department of Economic & Social Affairs 2011).

While Table 2.1 shows the ways that the breakdown of Real GDP growth, it is important to study Real GDP on its own as well. Table 2.1 gives an overall picture of the economic climate, but it is equally necessary to study Real GDP at face value, as opposed to just looking at it in relation to other variables in order to avoid erroneous conclusions. In some respects, Table 2.1 yields many questions. For example, in 2005-2007, the increases in Real GDP were met with increased inflation, even though many report high levels of economic growth during that time. For these reasons, it is important to include a chart that focuses on Real GDP on its own merit, which Table 3 does.

Table 3: Real GDP Growth

Table 3 gives a visual representation of the fluctuations in Egypt’s Real GDP growth rate. As the table shows, Real GDP was at an all-time low during the 1990s, but slowly started to increase over the years. In 1997, the Real GDP decreased in the wake of the East Asian financial crisis, and the Luxor Massacre, but slowly began to pick up in the late 1990s before decreasing after 9/11. In the early 2000s, the Real GDP increased once again, and peaked in 2005. The chart highlights the ways that the Egyptian economy vacillated in the wake of these internal and external conflicts, and the ways that the government was able to readjust following these circumstances.

Table 4 looks at inflation as a univariate variable. While Table 2.1 gave an overview of the intersectionality between Real GDP, inflation, government spending, and trade, it is important to look at these variables on their own in order to eliminate the possibility that the results could be attributed to an exogenous factor. Table 4 studies inflation by looking at the consumer and wholesale price inflation rates. While consumer price inflation rates focus on the ways that inflation impacts consumers, wholesale price inflation rates study the ways that inflation impacts interorganizational cooperation in terms of costs. To put it simply, no firm is an island; they cannot operate without the existence and assistance of another firm. In order to make a product, firms have to use inputs, which refers to the components that go into their products, in the creation of their particular product. Since inputs do not simply pop up out of nowhere, the firms need to buy the intermediary goods from another firm, and, thus, trading occurs. The wholesale price inflation rate studies the ways that a general price increase affects the level of cooperation amongst producers. Figure 4 outlines the differences below:

Figure 4: Consumer v. Wholesale Price Inflation Rates

As the figure shows, economic conditions in the early 1990s lowered both the consumer and wholesale price inflation rates, but, thanks to external issues in 1995, the price inflation rates for both groups rises. The rise could easily be explained by the external factors. Inflation measures the purchasing power of money relative to a base year. In other words, it studies the amount of goods an individual can buy with a fixed amount of money. When there is an economic crisis, there is a smaller set of goods, assets, and services in the economy, which affects the demand for them. While the economy was able to briefly recover, the Egyptian economy was significantly impacted by the events of 9/11, which is reflected in the figure. Yet, after 2001, it appears that the inflationary onus was shifted to the consumers, which suggests that the inflation could be attributed to decreasing productivity. Despite the sharp increases, the figure indicates that, in 2006 and 2007, the inflation rates affect consumers and large scale corporate trading equally, which, in some ways, suggests increased inflationary stability in the wake of these policies.

Table 5 specifically shows the ways that Egypt’s policies affected investment in both the public and private sector. As previously mentioned, GDP is measured in consumption, investment, government spending, and net exports. Generally speaking, when taxes are low, companies have more disposable income. Thanks to these particular policies, information technology was being sold at a substantially lower rate, which gave firms a market incentive to invest in new technology to increase their output and production possibilities. Table 5 highlights the changes in investment over the years.

Figure 5: Real Investment Over Time

As the figure shows, in the early 1990s, public investment was relatively higher than private investment. The disparity between public and private investment can easily be attributed to the state of economic affairs at the time. As previously mentioned, Egypt’s economy was devastatingly weak in the 1980s, and, as a result, private firms were dubious about investing their money in a potentially doomed economy. For these reasons, the government needed to make up for the deficit by investing their money back into the economy. By investing government money back into the economy, officials believed that they could, not only stabilize the GDP, but also pave the way for a more prosperous future. However, the figure shows that, in 1995, private investment begins to increase to the point where private and public investment were the same, which is a sign of economic improvement. For a brief period after 1995, private investment exceeded public investment, which can be attributed to the government economic crises following the financial fluke in East Asia and the Luxor Massacre. Yet, the figure also shows a sharp decrease in private investment in 2001 and the low rates continue to around 2004, which can be attributed to the lingering effects of 9/11. The figure reflects the ways that 9/11 impacted the Egyptian economy, which was primarily driven by tourism in the early 2000s. Yet, in 2004, private investment begins to increase, and, in 2006, private investment exceeds public investment, which can be attributed to some combination of the Cabinet’s recommendations, increased efficiency, and overall economic expansion.

Unfortunately, while Egypt made a number of economic strides on the international level, life for the average Egyptian remained relatively unchanged (Department of Economic & Social Affairs 2011). A 2007 World Bank report showed that poverty remained at 40%; however, while the poverty rate remained relatively unchanged, these policies had the most significant impact on the individuals that were on the brink of poverty were able to avoid falling into actual poverty during these years (UN Department of Economic & Social Affairs 2011).

Indubitably, industrialization affects manufacturing, which affects employment. Egypt, unfortunately, suffers from a very large population, relatively little industrialization, and high levels of unemployment, particularly the youth. Yet, in the wake of industrialization, we find that employment opportunities increase because laborers are needed to operate the machinery, which increases efficiency and produces overall marginal social benefits because it is associated with more job training and increased quality of life. Figure 6 shows the effect that industrialization has had on Egypt’s population.

Figure 6: Cobb-Douglas Labor v. Capital (‘95/’96)

Figure 6 outlines a Cobb-Douglas Production Function to show the relationship between labor and capital. Figure 6 shows the percentage of capital produced in relation to the manpower it took to produce it. The Cobb-Douglas Production Function illuminates both the outputs, which explains Egypt’s economy on the international level, and the inputs, which shows the ways that the international production is internalized on the domestic level. The capital/labor ratio highlights the relationship between capital and labor. In most cases, countries should look to make technological advances to use less manpower and improve efficiency; however, considering the state of affairs in Egypt, it is in Egypt’s best interest to employ more workers in order to reduce unemployment and improve their citizens’ quality of life to mitigate poverty, which is also a huge issue in Egypt.

While industrialization does mitigate the effects of poverty, it cannot completely eradicate it. It is important to account for the country, itself, by looking at the natural resources, and labor force. In other words, we must consider the ways that the country is naturally endowed in relation to its acquired characteristics. Although Egypt benefits from its Nile River, saying that Egypt is a well-endowed nation in terms of natural resources is a bit of a stretch. For these reasons, one must look at the labor force and study the ways that it contributes to general economic growth. Figure 7 studies Egypt’s manufacturing industry in relation to the North Africa region, as well as other countries that are in Egypt’s general category.

Figure 7: Manufacturing Analysis

The figure shows that, while the United Nations Department of Economic and Social Affairs committee suggested that Egypt’s GDP was low, UNIDO’s figure shows how Egypt fares in relation to their region and similarly-oriented developing countries. In 1981, Egypt actually exceeded both the North African and developing countries’ manufacturing value added, despite being considered low in relation to the rest of the world. Even in 1991 to 2001, which many claim were Egypt’s dark days, Egypt continues to trump the rest of their region and developing countries. It is important to study these links because region often impacts individual countries in them. For example, if there is a lot of violence in Libya, individuals would be less likely to book their vacations to that region because they fear conflict spillover, which could easily affect Egypt’s economy. At the same time, an increasingly globalized world has led to increased regional cooperation. As a result, we have seen regional organizations, like the African Union and the Organization of American States, that were developed to increase regional cooperation and trade gain more and more political and economic influence in their respective regions. It is, thus, crucial for economists to trace the links between a country’s health and the regional conditions.

In addition to studying regions, it is incredibly important to study countries in relation to other countries of their kind. In today’s world, countries are divided into many different categories based on their history, economic standing, and political structures. The categories include: first world, second world, third world, and developing countries. While these classifications yield many positive and negative associations, it is important to establish these boundaries for effective comparisons. In other words, we need to distinguish between countries because comparing a developing economy to a hegemonic power would be like comparing an apple and an orange. In that sense, if we compared Egypt’s manufacturing industry to Germany’s manufacturing industry, we would have skewed results that fail to consider Germany’s technological advantage relative to Egypt, and, consequently, many would assume that Egypt is much less developed than it actually is. For these reasons, it is important to compare countries that are of similar status so we can get an accurate picture. When we study Egypt in relation to other developing countries, we can see that Egypt is not so bad compared to others.

In addition to studying a country in relation to another, it is also important to evaluate the country’s economy based on the goods and services it produces. It would be incredibly confusing to compare a country, like Russia, that specializes in oil with a country, like Nauru, which exports bird feces. Figure 8 shows the main goods and services Egypt produces in relation to the North African region to paint a better picture of the economic conditions.

Figure 7: Egypt Relative to North Africa

Figure 8 shows the growth rate in particular goods and services in Egypt and North Africa. It is important to study the growth rate in particular industries, as this could be a sign of increasing industrialization and economic specialization. As the figure shows, Egypt’s annual growth rate in food, beverages, and tobacco nearly doubled the North Africa’s annual growth rate between 1991 and 2001. Similarly, Egypt’s marginal value added exceeded North Africa’s values for that time period. Based on the figure, it appears that Egypt maintains a competitive advantage relative to North Africa in terms of goods.

It is important to also look at competitive advantage in order to measure Egypt’s economic growth. Comparative advantage looks at nations’ production costs, and studies which nation can produce a product cheaper. Countries often specialize in one particular good or service, and trade with other countries that specialize in different types of goods and services to acquire more goods. Countries will pay up to the opportunity cost for that particular good, whcih determines trade price. Comparative advantage is an incredibly useful tool for us to study because it will tell us how much it costs Egypt to produce one unit of a particular good, and set the stage for parsing Egypt’s international trade. Figure 8 will outline Egypt’s opportunity costs for producing certain goods, and highlight where Egypt falls in relation to other nations.

Figure 9: Egypt’s Comparative Advantage in Goodies

Based on the figure, we can see Egypt’s strengths and weaknesses in terms of economic production. According to the figure, Egypt has a comparative advantage in the first four categories: textiles, clothes, minerals, and basic manufactures (Hawash 2007). Although the figure highlights Egypt’s relative strengths and weaknesses in particular good production, as a newly developing country, Egypt still has a long way to go to catch up to the rest of the world.

While Figure 9 provides an overview of Egypt’s relative standing for the production of particular goods, Figure 10 shows where Egypt falls in relation to North Africa and the rest of the world.

Figure 10: Egypt in the World

Based on the figure, Egypt contributes a lot of marginal value to the North African economies, but not a lot to the rest of the world. For example, while Egypt was able to comprise 40.2% of North Africa’s marginal value added for 2001, it was only able to comprise 1.1% in the developing countries total, and 0.3% of the total world. The variation can be attributed to the fact that North Africa has a lot of unstable economies and regional turmoil (World Bank 2015). Given the state of affairs in North Africa, it is safe to say that Egypt is one of the more developed countries, which explains why they account for a fairly high percentage of North Africa’s marginal value added. Unfortunately, Egypt does not fare as well in comparison to developing countries because, while Egypt is developing relatively quickly, they pale in comparison to countries, like China and India, which are also included in that general umbrella category. However, Egypt fares much, much worse when compared with the rest of the world, which includes countries, like the United States, that are extremely wealthy and have been industrialized for decades. When we look at Egypt compared to the rest of the world, we can see that they have quite a long way to go.

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